The widening Gulf

03 Jul 2018

MENA

Creating a Resilient Organisation

Allison Wood

The widening Gulf

June 5 marked the one year anniversary of Saudi Arabia, the UAE, Bahrain and Egypt cutting off diplomatic ties with Qatar and imposing restrictions on the movement of goods and people between their countries. While daily developments and uncertainty marked the early months of the dispute, it has now settled into a new normal. Most of the international community has made clear that they would prefer a united GCC. However, diplomatic forays during the early months of the dispute fell flat. Allies have now largely washed their hands of any significant involvement and turned their attention to other issues in the Middle East. Although Kuwait has yet to give up hope of brokering a resolution, its efforts seem increasingly futile as the dispute drags on. Diplomats from Qatar and the quartet of boycotting states remain unbending: neither side feels it is in the wrong, and there is little incentive for either to compromise. Saudi Arabia and the UAE in particular are content with Qatar’s isolation, and Doha remains defiant.

Qatar has broadly adhered to a policy of non-retaliation, but is starting to more overtly dig in its heels. On 27 May it banned imports of products from the countries enforcing the boycott. However, this declaration was largely symbolic: Qataris had already been informally boycotting Emirati and Saudi products for months, and the tactic of economically pressuring Qatar into submission has failed.

The IMF on 30 May assessed that the impact of the dispute on Qatar has been manageable, and that the country’s fiscal position has steadily improved following the initial shock. Qatar’s foreign currency reserves stood at USD 39.8bn at the end of April, compared with a low of USD 35.6bn in September 2017 and USD 45.8bn in the month before the dispute began. The banking sector has also stabilised after an initial outflow of around USD20bn funds from other Gulf investors. Qatar’s sovereign wealth fund repatriated USD 20bn – around 6% of its estimated holdings – to support the country’s economy. However, these sell-offs have mostly been in line with the fund’s broader shifts in investment strategy.

The silver lining of the dispute for Qatar has been that it has forced the country to accelerate the reforms that will improve its economy over the coming decades. This has included measures to diversify the economy, attract foreign investment, reduce public spending and consolidate state-owned companies. Economic growth will not return to the heyday of the mid-2000s when annual GDP climbed by nearly 20%. Nevertheless, Oxford Economics has forecast that non-oil GDP will continue to grow steadily at 4% to 6% each year between now and 2020.

As Qatar’s trade with Saudi Arabia and the UAE has dipped, its trade with Oman, India and Turkey has increased. Qatar will continue to develop political and economic relationships with these markets to ensure there is a steady stream of imports. It will also invest in agriculture, pharmaceuticals and light manufacturing to reduce the need to import essential goods. Qatari companies are increasingly looking to new markets, and particularly to those in Asia, for investment. And with the worst of the economic impact of the dispute apparently behind them, they will have increasing resources to do so.

The dispute is a landmark in a broader political shift. Gulf states are keen to diversify their economic and political relationships beyond their traditional partners, and they will do this primarily as individual states rather than collectively as part of the GCC. Countries that hoped to negotiate free trade agreements with the GCC as a bloc will be disappointed.

Competition, not cooperation, is increasingly the trend. All the Gulf Arab states face similar economic and demographic pressures, and have strikingly similar “visions” for development and diversification. This is leading these states to engage in an increasingly tit-for-tat approach to regulatory changes, with each side trying to better the other in terms of offering the more attractive environment for investors. This is, broadly speaking, good news for business, and particularly for new investors. However, it is also a stark reminder of the centralised and fickle nature of regulation in the Gulf. Governments have shown some willingness to listen to the private sector’s concerns, but the process of regulatory reform will remain opaque and the bureaucracy slow to accommodate and enforce any changes.

Government entities will increasingly prefer companies with an established local presence and a long-term commitment to investing in their respective countries, though such policies will remain largely informal. Saudi Arabia and the UAE are seeking to set the agenda for policy in the region and may increasingly pressure Oman and Kuwait to fall in line. International companies will need to consider how these dynamics might affect their business. They need to be able to communicate to key government stakeholders the value they bring to local markets and their contribution to broader national development objectives.

The dispute has also become personal for heads of state, as officials from the quartet have openly called for changes in Qatar’s leadership and promoted some more obscure members of its ruling family as having legitimate claims to power. The concentration of political power in the Gulf means the dispute could, in theory, be resolved as quickly as it was started. However, trust on both sides will be difficult to restore, and there remains the limited potential for things to get worse.

Although the effects will be long-lived, the break has not been completely clean. States on both sides have continued to cooperate in security exercises, counterterrorism initiatives and in purchasing gas from Qatar. Although broad-based cooperation on economic and foreign policy seems improbable over the coming years, there maintains an underlying recognition that the Gulf Arab states retain a degree of interdependence, and that security concerns – and preservation of family-based rule – are issues on which they will continue to agree. Should this remaining cooperation start to falter, it would presage further instability in the Gulf.

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